COMMENT

Market. No one knows how the bull market will end. It is always something that comes out of the blue. Sometimes the cause is internal to the market: the market “got stupid” during the dot-com era and it all fell apart. Other times, the cause is external. Even with 2008, people saw problems coming but no one understood how severe it was going to be. A bull market doesn’t end because stocks are overvalued. But when it does end, the overvalued stocks are the most vulnerable. Politicians like to take the credit for bull markets but they rarely have much control. Super-stimulation of the economy has an impact, but it can’t last. Similarly, very bad policies can sometimes bring down an economy, but usually the political effect is limited. A trade war, for example, drives up prices, which causes inflation. To counter the inflation, the central banks raise interest rates more than they had planned, and inevitably they go too far, and that drives the economy into a recession. There are reasons for trade disputes between the United States and China, but ultimately, spreading trade wars are the worst thing for the economy. At the moment, there are threats (like the ones against Canada) and skirmishes (like the ones between China and the US). If this escalates into a worldwide trade war, the effect will be like the 1930’s.

COMMENT

Comment on Utilities. In response to a question about utilities he said that he owns some utilities, that they are appropriate for clients who need income. However, it is important to limit exposure to them when interest rates go up. Investors should hold fewer of them when interest rates are going up and more when interest rates are going down. At this time, it is early in the cycle of rising interest rates, so utility stock prices are likely to drop further. Most utilities raise their dividend annually, so the yield will rise as the investor holds them. It is reasonable to continue to hold them but unwise to buy more of them until interest rates stop going up.

DON'T BUY

More capital has been destroyed by the airline business than by any other business in history. There are times to own them--as trades, not as long-term investments. Demand and fuel costs are the primary impacts on airline stock prices. Demand is good now, but fuel costs are rising, which will become a big negative. In addition, as demand rises, airlines add routes, cut fares, and wipe out their profits. This is a cyclical business. It is best to own an airline that is disciplined, when demand is good and when oil prices are coming down.

DON'T BUY

In the past, he has favoured WestJet because its management is disciplined, they operated a single type of plane, they had happy non-unionized employees, and they focused on the Canadian market. But then they decided they wanted to be Air Canada. They operate several types and sizes of planes on more routes--if he had to invest in an airline now, it probably would NOT be Westjet. They were the Southwest of Canada but they have destroyed what they had, WestJet’s share price has been drifting sideways while Air Canada’s has been rising. He asserted that WestJet’s problems are all self-inflicted.

DON'T BUY

The caller was looking for a safer way to invest in cannabis stocks and suggested alternatives to Aurora. Mr. Levine said that he is not sure there’s a safe way to invest in any cannabis stock. He doesn’t own any marijuana stocks and thinks that his clients would rightly fire him if he bought any. The risk profile and volatility of this industry are far too high at this time. Aurora has a market cap of $12 billion against only $50 million in sales. For any rational investor, this makes no sense. It is potentially profitable for short-term trading by a speculator or gambler. He faced the same types of investment risks during the dot-com era and refused to invest in the rapid-growth stocks of that time, which rose dramatically and then went bust. With specific respect to Aurora, he says that the CEO is not a Bruce Linton. He considers the Aurora CEO far too promotional for a $9 billion business.

HOLD

Asked to compare Enbridge and TransCanada, he said he currently owns only Enbridge. Both are utility companies. Both pay high yields. Their stock prices are very interest-rate sensitive because interest rates drive the relative value of their dividends and because they borrow enormous amounts of money and interest rates determine the cost of carrying these loans. Enbridge focused on growth for a while, making its stock more attractive, but it took on too much debt and has had to focus on dealing with that. He is holding stock in Enbridge for clients who need steady income and he does buy it when the stock price falls too much, but this is, in general, the wrong time to buy utilities. Yield 6%.

HOLD

Asked to compare Enbridge and TransCanada, he said he currently owns only Enbridge. Both are utility companies. Both pay high yields. Their stock prices are very interest-rate sensitive because interest rates drive the relative value of their dividends and because they borrow enormous amounts of money and interest rates determine the cost of carrying these loans. He holds utility stocks for clients who need steady income but this is, in general, the wrong time to buy utilities.

BUY

He likes US banks and prefers them to Canadian banks. US household debt is lower than Canada’s. Interest rates are likely to rise faster in the US than in Canada, which is good for US bank stocks. When 10-year bond rates finally rose higher than 3%, US banks started rising again. He owns two regional US banks and is currently looking at a large US bank. Overall, he likes the sector, including JP Morgan, but he is not planning to buy that particular bank.

BUY

He owns it. It pays a dividend that is higher than most other energy companies. In general, oil and gas prices in Canada are depressed by the lack of takeaway capacity. Vermillion benefits from the worldwide rise in oil prices because the majority of its assets are outside of Canada. For an investor who is looking for a Canadian energy stock, he recommends Vermillion.

PAST TOP PICK

(A Top Pick September 27, 2017. Up 10%). This is a stock that people love to hate, because an influential short-seller talks about it repeatedly. That has put a lid on the stock, but the company itself keeps coming through. The company had a bad quarter in the first quarter of last year, but has been doing well since then. Management has been doing a good job and he is happy to stay on the stock.

PAST TOP PICK

(A Top Pick September 27, 2017. Up 22%). This was called Cara. It owns Swiss Chalet and is the largest restaurant chain in Canada. The company suffered after he bought it because of the downturn in the economy in Alberta. Restaurants are heavily dependent on growth in same-store sales, which suffer in a downturn. Recipe Unlimited countered this in three smart ways: (1) They bought St-Hubert in Quebec, which diversified their market and gave them a strong brand; (2) They bought the Keg, which moved them upscale with a very good growth profile; (3) They brought in a new CEO with a very good track record. The company is still Ontario-centric, but much less than it used to be.

PAST TOP PICK

(A Top Pick September 27, 2017. Up 27%). This was out of favour when he bought it. It was down because it grows by acquisition. It bit off a couple of big acquisitions and the market was unsure how well it could manage them. As it turned out, they did well.

BUY

Railroads are drivers of the economy. They move the goods. The US economy is strong and so the railroads are strong. CN has a monopoly on the port of Prince Rupert, which is the closest port to Asia. CN will also be a big beneficiary of the lack of new pipelines in Canada. CP and CP are both gearing up to move more oil. This is more expensive than moving oil by pipelines, but it is necessary at this time.

WATCH

In general, he finds retail stocks hard to make money on, especially fashion-oriented ones. Sleep Country sells mattresses, not fashion goods, so it is more interesting to him. However, its market cap is too small for his investing approach. He has looked at it several times and has missed several good opportunities in the stock. The stock price has suffered over the past year after very strong growth in the years before that. There has been a proliferation of online providers of mattresses and they are competing effectively against companies like Sleep Country. Sleep Country has gone online as well, and he thinks they provide an excellent customer experience. However, he expects them to lose more share and he expects the stock price to go further down. At some point, the drop will be overdone and it will be a good company to buy. But not yet.

COMMENT

He has owned this in the past. It defies Amazon and the internet because people love the shopping experience at Costco. Its price keeps rising--this is not a value stock and so it is not for him and his clients, but it is an amazing retailer. This is a stock that someone who likes growth companies can own because it executes its business fabulously. They make their money on the memberships rather than on the margin on the merchandise they sell.